May16

Small Business Exemption to Marketplace Fairness Act May Boost Small Ecommerce Sites

Anyone managing an ecommerce site has to realize that the clock is ticking on the waiver for collecting sales tax from out of state customers for online and catalog purchases. However, ecommerce sites with less than $500,000 in annual sales could reap a big benefit from legislation that is currently working it way through Congress.

The Marketplace Fairness Act, introduced to Congress in November, would create a federal online sales tax. However, as currently written, the bill provides special treatment for smaller businesses. The bill only authorizes a state to require a seller to collect sales taxes if the merchant’s “total remote sales” are more than $500,000 on an annual basis. If less, the merchant earns an exemption.

Given that the out of state sales tax on online purchases will be between 4-9%, if the current version of this bill is passed it gives small online merchants a price advantage on a gross price basis. Online shoppers can be tremendously price conscious, and the difference in whether sales tax is required makes for a meaningful difference in cost. Thus, if the small business sales tax provision remains in the version of this bill that becomes law, small ecommerce businesses would gain a huge advantage when selling out of state. Given how price competitive Internet shoppers tend to be, a 4-9% price advantage on the net price of items would be a difference maker for niche sites.

It is far too soon for small ecommerce sites to start counting the new sales that will role in. It may be another year or two before some sort of  variation on the Marketplace Place Fairness act becomes law, and there is certainly no guarantee that it will include a small business exemption. However, given the struggles of many small ecommerce business due to:

  1. the Google algorithm giving increased weight to sites with hefty domain authority; and
  2. the increased cost of paid clicks making PPC challenging to pay out;

the online merchants that are still left standing could benefit greatly from a federal online sales tax. It is not out of the relm of possibility that the legislation could caused some small online merchants to struggle with the problem of breaking through the $500,000 per year level.

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